Statement Of Earnings

The statement of earnings--otherwise known as the income statement--summarizes the sales revenue and expenses and the resulting profit for the preceding week, month, or year. Managers can request statements from the accounting department as often as necessary to keep the business on a sound footing, but the annual financial reporting required by the Securities and Exchange Commission must be carefully and accurately drafted.

This annual income statement is accompanied by a cash flow statement and a balance sheet to round out a total analysis of the financial condition of a company. The income statement reports broadly on two kinds of financial activities: ongoing, ordinary sales and expenses, and extraordinary revenues and losses. A stable company that has been in business many years may have only the first category to report.

Ordinary Revenues and Expenses

Although there is no requirement for a set number of categories in the income statement, companies commonly have at least four. There should be a cost of goods sold expense, which consists of sales revenue and production costs. A category of sales, administrative, and general expense is just what it sounds like--a wide-ranging group of expenses that includes those not included on other lines of the statement.

Interest expense is interest paid on any borrowed money or loans. Income tax expense is strictly income tax paid by the company; other taxes are included in the sales, administrative, and general expense category. Such a statement of earnings, while important to understanding the financial condition of a business, must be considered along with the other two sections of the financial statement--cash flow statement and balance sheet.